CNBC is reporting that Microsoft is hard at work at making a Zune phone.

I’m hearing that a prototype of the new Pink could be unveiled as soon as the Consumer Electronics Show in January, but that it could be pushed back into a February release. Some reports suggest the phone could be released at the 3GSM conference and that a wide shipment release could be a year away. The idea, my source says, is to develop a product that offers true competition to Apple’s iPhone which continues to enjoy huge market momentum.